Saturday, June 14, 2014

From May 15th until May 17th, the Bitcoin 2014 conference took place in Amsterdam. One of the break-out sessions was dedicated to the topic of Anti-Money Laundering on Transparent Networks. During this session, Dirk Haubrich of the European Banking Authority (EBA) outlined some of the issues and concerns of the EBA with respect to digital currencies and bitcoin.

In his initial statement Haubrich sketched the concerns of the EBA with respect to:
- the use of digital currencies to transfer the proceeds of crime and act as money transmission,
- the fact that anonimity is a burden to link the transactions to persons,
- seizing assets and restoring or undoing criminal or illegitimate transfers,
- the emergence of a hawalla-like new channel via which international transfers may occur to countries that are on the FATF-sanction list,
- the use of those currencies by terrorists and criminals,
- the integrity of creators of digital currencies.

Role of the EBA
As a part of the discussion, mr Haubrich outlined that the EBA has a specific remit in the area of consumer protection and financial innovation. It is from this perspective that the EBA issued its warning on virtual currencies in December 2013. The question whether or not to further regulate virtual currencies is now being investigated by a cross-sectoral working group of European supervisors. This group will publish its outcome in a couple of months.

When asked to discuss the major challenges for digital currencies, he outlined anonimity and it-security as major topics of concern. In combination with the aforementioned list of concerns, the overall impression was one in which further regulation appeared to be more likely than a continuation of the current hands-off approach.

Tuesday, June 03, 2014

Just one hour ago DNB, the Dutch central bank and bank supervisor, issued a warning on bitcoin. It was not the regular warning or disclaimer for consumers, but a warning for the payments industry. Essentially DNB concludes that virtual currencies (bitcoins and altcoins) are viewed as products with a very high risk profile. DNB also announces that it will strictly supervise banks and payment institutions:

DNB will therefore strictly assess the compliance with applicable law (a.o. Wwft and Wft) for those banks and payment institutions that decide to get involved - in whichever way - with virtual currency-companies or that decide to invest in virtual currencies themselves. In 2014, DNB will investigate whether banks and payment institutions are actively involved with new payment products such as virtual currencies and (it) will assess the degree to which these institutions control/manage their integrity risks. The control should include effective measures with respect to client acceptance and the monitoring of new innovative suppliers.

Guidance considerations
The brief statement of DNB contains some considerations that are the basis for this decision. A first consideration has to do with anonimity. DNB notes that transactions are being recorded in a public transaction ledger. Given that these transactions cannot be matched to physical persons and the virtual currencies are usable as a means of payment, they are an attractive chain of a money laundering process.

The current anonimity in virtual currency systems has consequences for banks and payment institutions. As a result of this anonimity, the buyers and sellers of virtual currencies become indirect relations of the bank. Thise indirect relations can also affect the reputation of the institution which leads to a 'derived' integrity risk. Without having that intention, banks and payment institutions could be facilitating money laundering.DNB doubts whether banks and payment institutions are able - as a part of their controlled business operations and integrity of policies - to take the appropriate measures for transactions or clients that involve virtual currencies.

A meteorite or a pebble in the virtual currency pond ?
With the statement being just published it is too early to tell whether this is a meteorite that effectively wipes out the virtual currency business in the Netherlands or whether it is merely a pebble that aims to ensure that all virtual currency businesses doing business in the Netherlands ensure full identification and transaction monitoring.

My best guess is that the strong wording is used to stress the urgency and degree of concern that the Dutch bank supervisor has on this matter. So anyone operating in the Dutch environment better take this to heart.